Nothing excites the oil and gas industry quite like a major Russian-American collaboration: something clearly exemplified by the ExxonMobil Rosneft partnership, a deal that will deliver significant benefits to both parties. Rosneft and Russia gain access to the enormous technical capabilities of the US leading oil corporation, while ExxonMobil can tap into Russia’s substantial oil reserves and the local know-how Russia’s largest state oil company can bring to the table.
Although ExxonMobil’s oil reserves are of significant interest to Rosneft, it is the company’s technological prowess and expertise that sealed the deal. Exploration and drilling in offshore environments such as the Black Sea shelf require specialist technologies and equipment that the US company has developed on other sites around the world. ExxonMobil’s understanding of the technological, environ- mental and economic developments in the field is expected to advance both Rosneft’s interests and the Russian industry as a whole.
The deal has struck a clear note with Russia’s hierarchy, who hail the pact as ‘truly strategic partnership’, citing ExxonMobil’s experience in exploiting Arctic reserves in Canada as an example of its work in challenging conditions.
A strong deal for both sides
For Rosneft’s part, the deal creates exceptional financial benefit as ExxonMobil has agreed to take on the preliminary costs of the exploration. But the deal is not a one-sided agreement: ExxonMobil is tapping into significant reserves. According to Houston-based DeGolyer & MacNaughton, a consultancy firm specialising in assessing and auditing the upstream hydrocarbon potential of oil exploration areas, Rosneft’s proven Petroleum Resources Management System (PRMS) reserves represented 2.5 billion tons of oil and almost 800 billion cubic meters of gas at the end of 2010, with Rosneft’s international-standard proven reserve replacement ratio in 2010 standing at 106 percent. Put into tangible figures, at the end of 2010, Rosneft’s hydrocarbon reserves are deemed to last for 25 years, with oil reserves lasting for 21 years and gas reserves lasting for 67 years.
But facts and figures only present one side of the story; the future potential of exploration is also key. Rosneft and ExxonMobil have executed a Strategic Cooperation Agreement under which they will explore and develop hydrocarbon resources in Russia, the US and other countries. The $3.2bn funding of exploration and the development of the East Prinovozemelskiy blocks one, two and three in the Kara Sea and the Tuapse Trough in the Black Sea are at the centre of the agreement. These regions are two of the most promising – and least explored – offshore oil and gas areas in the world, with extremely high potential for the exploration of both liquid and gas fuels.
But Rosneft has struck a particularly good deal. Its equity interest in both of these joint ventures will be 66.7 percent, while ExxonMobil will hold a 33.3 percent stake. The deal will also provide Rosneft with an opportunity to gain an equity interest in a number of operations in ExxonMobil’s assets in North America, including offshore fields in the Gulf of Mexico, tight oil fields in Texas, exploration in Canada and several projects in other countries. Both companies have also agreed to cooperate in the study of tight oil and unconventional reserves in Western Siberia.
In addition, Rosneft and ExxonMobil will implement a programme of personnel exchanges for technical and management employees. This will help strengthen the relationship between the companies and provide valuable career development opportunities for key executives at both companies. In addition, Rosneft will exercise the right to invite ExxonMobil’s employees as consultants on its projects, and both companies will be entitled to send delegates to the various exploration sites.
The arctic research centre
Rosneft will also focus on environmental as well as health and safety concerns. It is looking to create modern safety systems that mitigate the risks of offshore operations and global best practice. The environmentally-sensitive areas of the East Prinovozemelskiy license blocks span over 126,000sq. km while the Tuapse Trough license block covers 11,200sq. km. The companies will be subject to complex ice conditions with winter temperatures expected to reach minus 26 degrees Celsius.
However, Rosneft believes the use of new technologies and the joint expertise of the two companies will help mitigate such environmental obstacles. In order to address this challenge, the partners of Rosneft and ExxonMobil have joined forces to establish an Arctic Research and Design Centre for Offshore Developments in Russia.
The Research and Design Centre, which will be run by Rosneft and ExxonMobil employees, will focus on developing new technology in order to support the joint Arctic and deep water drilling projects in the Black Sea. Both companies believe that such scientific development is of key importance for the future of the company and the industry.
Leading industry experts from both companies will help develop new technologies to facilitate the implementation of the joint projects in the Arctic, including drilling and production vessels and platforms with ice reinforcement, as well as other projects of the Russian state-owned company. Exxon will fund the initial costs of establishing and operating the centre.
Rosneft has placed technological advance- ment high on its agenda because it feels it will help it become more competitive. Gaining access to ExxonMobil’s advanced technology and its pool of knowledge in reducing the environmental impact and improving the safety of deep sea drilling will enable the company to achieve access to previously-unattainable fuel sources. This is vital to developing the company’s own technology, thereby improving working conditions for its employees and enhancing its market capitalisation.
The financial strength of the partnership is also of key importance to Rosneft. The choice of ExxonMobil as a partner, with its unique resource base featuring the largest and most highly capitalised company in the world, reflects its commitment to increase the capitalisation of the company through the application of advanced technologies, to bring an innovative approach to business and to strengthen the human resource capacity.
Rosneft leading the way in transparency and CSR
Aside from the partnership, another notable achievement likely to please Rosneft’s shareho- lders is the fact that the company has now made it to the top of the S&P transparency and disclosure list for Russian companies. But achieving this has not been easy. It was a highly complex process that required a considerable investment of time to understand the requirements of and resolve transparency issues. Barriers had to be lifted internally, which is often a hard task, but the entire team knew that transparency is especially difficult for big companies. Their achievement in terms of disclosure has impressed industry observers and delighted investors.
Rosneft updates its investors regularly and publishes its annual results in line with all the other international companies. Directors point to the drop in the number of enquiries from shareholders for corporate information and clarification as the best indicator of its success in achieving improved governance.
A national role
Aside from maintaining a highly transparent environment for its shareholders, Rosneft is also actively supporting the Russian nation as a whole. For example, an estimated 40 percent of the country’s budget is derived from the contribution of the oil and gas industry, and of this, approximately 20 percent comes from the taxation of Rosneft and its employees. In short, Rosneft is one of the biggest fiscal contributors in Russia.
The importance of this deal for Russia and its oil industry cannot be underestimated. Rosneft has operations that are vital in terms of the viability of the Russian economy. For instance, the refineries in the various regions of Russia are the country’s key employers, and the company makes sure that it is actively involved in local programmes that help finance charities, churches, schools, and universities.
